QUESTION TWO $[25]$

Automore Ltd manufacturers components for motor vehicle assemblers. Although new

motor vehicle sales are starting to improve, Automore is still operating for only $3500$ direct

labour hours per month, which represents $70$ per cent of normal capacity.

One of Autoquip$$s valued customers, Techtron Ltd$,$ has approached the marketing director

with a proposal to buy a modified version of one of Automore$$s existing components, DXX$.$

The order is for $1000$ units per month, for three months, at a price of R$102$ per unit.

Techtron$$s regular overseas supplier has been temporarily shut down, following a fire in its

factory.

Automore$$s standard direct manufacturing cost for component DXX$,$ without modification, is

as follows:

R

Direct materials $30$

Direct labour $(1$ hour$)25$

Standard direct cost $55$

$3$

As expected, these direct costs are variable in nature.

Manufacturing overhead is absorbed into production at the predetermined rate of $80\%$ of

standard direct labour cost. This overhead rate consists of the following:

$\%$ standard direct labour cost

Variable manufacturing overhead $20\%$

Fixed manufacturing overhead $60\%$

Predetermined manufacturing overhead rate $80\%$

Variable manufacturing overhead varies with direct labour cost.

Automore$$s normal pricing policy is to add a $40\%$ markup to total manufacturing costs.

The production manager has estimated that to modify component DXX to Techtron$$s

specifications, the following would be necessary:

Additional raw materials per component

Two units of an existing inventory item PQ$,$ which has a book value of R$6$ per unit, would be

needed. There are $6500$ units of PQ on hand. This material is not regularly used and the

stores manager is planning either to dispose it for R$2$ income per unit, if not used for the

Techtron order, or to use it as a substitute for material RT$.$ One unit of PQ could replace one

unit of RT$,$ which is used in the manufacture of another component. No inventory of RT is on

hand at present, and its purchase price is R$7$ per unit.

Additional direct labour per component $(0\mathrm{.}50$ hours per unit$)$

The only additional fixed manufacturing overhead that would be incurred if Techtron$$s order

was accepted would be an amount of R$11000$ per month to cover increased supervision

and clerical costs. If necessary, direct labour could work overtime at the rate of $1\mathrm{.}5$ times the

standard rate of pay.

$4$

Required:

$2\mathrm{.}1$ Determine whether Automore has the necessary capacity to manufacture Techtron$$s

order, including medication, in normal time. $(3)$

$2\mathrm{.}2$ Calculate the total relevant cost of accepting this order and what effect it will have on

the organisation$$s profit over the three$-$month period. In your answer, briefly state

why you have included or excluded from your calculations each cost and revenue

item presented in the question. $(15)$

$2\mathrm{.}3$ Determine the minimum price per unit that Automore could charge Techtron without

changing its existing profit. $(2)$

$2\mathrm{.}4$ Discuss what other factors Automore should consider when deciding whether to

accept the order at the price offered. $(5)$